The Government came into office hoping that by boosting economic growth it could maintain and expand welfare provision and pursue its many other objectives without excessive levels of taxation. It has not so far been successful; indeed, GDP appears to have fallen in the last two months.
The UK’s poor growth performance in recent years has many causes, but one important factor has been the way in which our labour market has been increasingly hampered by regulations and mandates imposed by successive administrations of both major parties.
As I argue in my latest paper for the Institute of Economic Affairs, a well-functioning labour market is one which adapts rapidly to change, reallocating people from low-productivity to high-productivity jobs as new opportunities emerge. Our setup has never been perfect, but for a long time we were able to point to a labour market which was more flexible than most European equivalents, with more of the working-age population employed and fewer unemployed or inactive. This advantage has now been eroded, with more and more mandated benefits which the employer must provide, and tighter and tighter prescription of what goes into employment contracts. So productivity has flatlined and growth virtually disappeared.
Take pay arrangements for example. Our national living wage is now one of the highest in the world, and makes it difficult for young workers to get entry-level jobs. The law on minimum wages is much more complicated than many imagine, and has led many well-meaning small businesses to fall foul of the rules. Meanwhile, the expansive tribunal interpretation of equal pay legislation means that women working on Asda tills must be paid the same as men working in warehouses, ignoring demand and supply and thus distorting the market. It is also the fundamental problem behind the seemingly endless Birmingham bin strike.
Employers have to provide a growing range of benefits (for example, parental leave, flexible working and pension auto-enrolment) which act as hidden payroll taxes, reducing firms’ willingness to employ permanent staff – and also leading to slower pay growth as businesses gradually pass the costs on to employees.
Unfair dismissal legislation means organisations live in fear of tribunal claims (currently 25,000 a year). Reluctance to fire poorly-performing workers can mean productivity suffers – not helped by firms trying to minimise numbers of permanent staff by using short-term, agency or zero-hours contracts instead.
A major concern is discrimination law, where courts have continually expanded the scope of loosely-drafted legislation; paradoxically this may have reduced job opportunities for some groups with protected characteristics, older workers and those with disabilities for example.
As a consequence of the growing jungle of regulation, large organisations feel obliged to employ more and more HR people to ensure compliance – 450,000 at the last count. The HR profession no doubt has many virtues, but its professional drift is to ‘gold-plate’ mandates to minimise risk, and to provide excessive levels of training activity – none of which adds significantly to productivity.
Another hidden cost which the Government imposes is occupational licensing, which now covers about a fifth of all employees. This raises costs to the public, businesses and individuals – who have to bear the cost of passing exams and ‘continuing professional development’. While few would dispute the need for doctors and nurses to be subject to government regulation, it is less obvious that this is needed for estate agents, farriers, art therapists and train drivers – where quality could be maintained without the state being involved.
A radical right-wing government could really shake up the labour market by stripping back employment legislation to the bare bones. This might involve some restrictions on child employment, limits on hours worked by people working in transport and healthcare, cheap means of enforcing contracts, a compensated form of no-fault dismissal, and a much narrower focus on discrimination.
But what we’re getting is the Employment Rights Bill, a 300-page doorstopper which adds a bagful of new mandates. It effectively imposes a £5 billion ‘stealth tax’ on employers, ultimately to be passed on to workers in lower wages.
The Bill’s measures – including Day-One unfair dismissal rights, restrictions on zero-hours contracts, a default right to flexible work and enhanced powers for unions – can surely do nothing to promote the growth which the Government wishes to promote. It will make employers more risk-averse in hiring decisions, and make it more difficult to arrange changes in work organisation which could boost productivity.
An increasingly scelerotic labour market will particularly penalise new labour market entrants, who will struggle to find suitable work; expect higher youth unemployment and inactivity. But we will all suffer as faster economic growth, which could in principle ameliorate our desperate fiscal position, becomes a lost hope.
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Too many of Britain’s next generation are in danger of being cut adrift from the world of work. The latest figures show that one in eight of those aged 16-24 are currently not in education, employment or training – or NEETs. Such a figure – which equates to more 957,000 people – has been unimaginable […]
